By Leika Kihara

TOKYO (Reuters) -Bank of Japan Governor Kazuo Ueda said the central bank could raise interest rates next month depending on economic data available at the time, underscoring its resolve to steadily push up borrowing costs from current near-zero levels.

While rising import costs from a weak yen may weigh on household spending, increasing wages will underpin consumption and keep the economy on track for a moderate recovery, Ueda told parliament on Tuesday.

“Our decision on bond-buying taper and interest rate hikes are two different things,” Ueda said. “There’s a chance we could raise interest rates at our next policy meeting, depending on economic, price and financial data and information available at the time.”

At its policy meeting on Friday, the BOJ decided to start trimming its huge bond purchases and announce a detailed plan in July on reducing its nearly $5 trillion balance sheet, taking another step toward unwinding its massive monetary stimulus.

The decision has heightened uncertainty on whether the BOJ could also hike short-term rates at its July 30-31 meeting or hold off until later in the year to avoid upending markets.

Ueda said the BOJ was not yet fully convinced that inflation will sustainably hit its 2% target, stressing the need to spend “a bit more time” to scrutinise data before raising rates again.

But he said corporate price- and wage-setting behaviour has clearly changed amid record profits and a tightening job market.

“The economy will likely see more clear signs of a positive wage-inflation cycle” as nominal wages rise, he said.

Ueda offered no clues on the pace and size of the BOJ’s bond taper plan to be announced next month. He said the central bank will avoid using its bond-buying operation as a monetary policy tool, or a means to communicate its policy intention.

The BOJ exited negative rates and bond yield control in March in a landmark shift away from a decade-long, radical stimulus programme.

With inflation exceeding its 2% target for two years, it has also dropped hints that it will raise short-term rates to levels that neither cool nor overheat the economy – seen by analysts as somewhere between 1-2%.

In a sign of broadening inflationary pressure, the price Japanese firms charge each other for services with high labour costs rose 2.8% in April from a year earlier, BOJ data showed on Tuesday, marking the fastest increase in nearly four years.

A weak yen complicates the BOJ’s policy path. While it accelerates inflation by pushing up imported goods prices, the subsequent rise in living costs has weighed on consumption and cast doubt on the strength of Japan’s economy.

Many economists expect the BOJ to hike interest rates to 0.25% this year, though they are divided on whether it will come in July or later in the year.

(Reporting by Leika Kihara; Editing by Christian Schmollinger and Kim Coghill)

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